SEC Filing - i3 Verticals

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iiiv-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-38532

i3 Verticals, Inc.

(Exact name of registrant as specified in its charter)


Delaware			82-4052852
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
40 Burton Hills Blvd., Suite 415
Nashville, TN			37215
(Address of principal executive offices)			(Zip Code)
(615) 465-4487
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.0001 Par Value	IIIV	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of August 6, 2021, there were 21,979,009 outstanding shares of Class A common stock, $0.0001 par value per share, and 10,229,142 outstanding shares of Class B common stock, $0.0001 par value per share.

TABLE OF CONTENTS


			Page
PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Operations			5
Condensed Consolidated Statement of Change in Equity			6
Condensed Consolidated Statements of Cash Flows			8
Notes to the Unaudited Condensed Consolidated Financial Statements			10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3. Quantitative and Qualitative Disclosures About Market Risk			60
Item 4. Controls and Procedures			60

PART II. OTHER INFORMATION			61
Item 1. Legal Proceedings			61
Item 1A. Risk Factors			61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 3. Defaults Upon Senior Securities			61
Item 4. Mine Safety Disclosures			61
Item 5. Other Information			61
Item 6. Exhibits			61

SIGNATURES			62

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	June 30,		September 30,
	2021		2020
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	4,653	$	15,568
Accounts receivable, net	28,914		17,538
Settlement assets	4,963		—
Prepaid expenses and other current assets	10,755		4,869
Total current assets	49,285		37,975
Property and equipment, net	5,971		5,339
Restricted cash	10,602		5,033
Capitalized software, net	41,387		16,989
Goodwill	284,251		187,005
Intangible assets, net	178,881		109,233
Deferred tax asset	51,247		36,755
Operating lease right-of-use assets	14,483		—
Other assets	8,495		5,197
Total assets	$	644,602	$	403,526

Liabilities and equity
Liabilities
Current liabilities
Accounts payable	$	6,415	$	3,845
Accrued expenses and other current liabilities	45,905		24,064
Settlement obligations	4,963		—
Deferred revenue	20,118		10,986
Current portion of operating lease liabilities	3,185		—
Total current liabilities	80,586		38,895
Long-term debt, less current portion and debt issuance costs, net	212,644		90,758
Long-term tax receivable agreement obligations	39,626		27,565
Operating lease liabilities, less current portion	11,948		—
Other long-term liabilities	17,670		6,140
Total liabilities	362,474		163,358
Commitments and contingencies (see Note 10)
Stockholders' equity
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2021 and September 30, 2020	—		—
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 21,960,059 and 18,864,143 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively	2		2
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 10,229,142 and 11,900,621 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively	1		1
Additional paid-in capital	207,697		157,598
Accumulated (deficit) earnings	(7,463)		(2,023)
Total stockholders' equity	200,237		155,578
Non-controlling interest	81,891		84,590
Total equity	282,128		240,168
Total liabilities and equity	$	644,602	$	403,526

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020

Revenue	$	61,964	$	31,573	$	153,140	$	111,862

Operating expenses
Other costs of services	16,064		10,001		41,044		34,874
Selling, general and administrative	37,296		18,133		92,769		58,206
Depreciation and amortization	6,995		4,475		17,938		13,668
Change in fair value of contingent consideration	3,609		(1,473)		5,835		(1,461)
Total operating expenses	63,964		31,136		157,586		105,287

(Loss) income from operations	(2,000)		437		(4,446)		6,575

Other expenses
Interest expense, net	2,704		2,423		7,092		6,621
Other expenses (income)	—		829		(2,353)		829
Total other expenses	2,704		3,252		4,739		7,450

(Loss) before income taxes	(4,704)		(2,815)		(9,185)		(875)

Benefit from income taxes	(110)		(5)		(416)		(1,918)

Net (loss) income	(4,594)		(2,810)		(8,769)		1,043

Net (loss) income attributable to non-controlling interest	(1,286)		(2,454)		(3,328)		811
Net (loss) income attributable to i3 Verticals, Inc.	$	(3,308)	$	(356)	$	(5,441)	$	232

Net income (loss) per share attributable to Class A common stockholders:
Basic	$	(0.15)	$	(0.02)	$	(0.26)	$	0.02
Diluted	$	(0.15)	$	(0.02)	$	(0.26)	$	0.01
Weighted average shares of Class A common stock outstanding:
Basic	21,926,225		14,858,858		20,658,700		14,515,506
Diluted	21,926,225		14,858,858		20,658,700		15,919,364

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(In thousands, except share amounts)


	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Retained Earnings (Deficit)		Non-Controlling Interest		Total Equity
	Shares	Amount		Shares	Amount
Balance at September 30, 2020	18,864,143	$	2	11,900,621	$	1	$	157,598	$	(2,023)	$	84,590	$	240,168
Equity-based compensation	—	—		—	—		3,441		—		—		3,441
Net (loss)	—	—		—	—		—		(2,572)		(1,549)		(4,121)
Redemption of common units in i3 Verticals, LLC	1,019,609	—		(1,019,609)	—		7,185		—		(7,185)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		1,257		—		—		1,257
Exercise of equity-based awards	121,019	—		—	—		688		—		—		688
Allocation of equity to non-controlling interests	—	—		—	—		(1,072)		—		1,072		—
Balance at December 31, 2020	20,004,771	2		10,881,012	1		169,097		(4,595)		76,928		241,433
Equity-based compensation	—	—		—	—		4,142		—		—		4,142
Net income (loss)	—	—		—	—		—		440		(493)		(53)
Redemption of common units in i3 Verticals, LLC	651,870	—		(651,870)	—		4,529		—		(4,529)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		897		—		—		897
Exercise of equity-based awards	59,745	—		—	—		(199)		—		—		(199)
Allocation of equity to non-controlling interests	—	—		—	—		(9,908)		—		9,908		—
Issuance of Class A common stock under the 2020 Inducement Plan	1,202,914	—		—	—		35,245		—		—		35,245
Balance at March 31, 2021	21,919,300	2		10,229,142	1		203,803		(4,155)		81,814		281,465
Equity-based compensation	—	—		—	—		5,111		—		—		5,111
Net (loss)	—	—		—	—		—		(3,308)		(1,286)		(4,594)
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		(141)		—		—		(141)
Exercise of equity-based awards	40,759	—		—	—		287		—		—		287
Allocation of equity to non-controlling interests	—	—		—	—		(1,363)		—		1,363		—
Balance at June 30, 2021	21,960,059	$	2	10,229,142	$	1	$	207,697	$	(7,463)	$	81,891	$	282,128

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)

(In thousands, except share amounts)


	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Retained Earnings (Deficit)		Non-Controlling Interest		Total Equity
	Shares	Amount		Shares	Amount
Balance at September 30, 2019	14,444,115	$	1	12,921,637	$	1	$	82,380	$	(2,309)	$	62,368	$	142,441
Cumulative effect of adoption of new accounting standard	—	—		—	—		—		705		640		1,345
Equity-based compensation	—	—		—	—		2,124		—		—		2,124
Net (loss) income	—	—		—	—		—		(149)		2,083		1,934
Exercise of equity-based awards	53,662	—		—	—		351		—		—		351
Balance at December 31, 2019	14,497,777	1		12,921,637	1		84,855		(1,753)		65,091		148,195
Equity-based compensation	—	—		—	—		2,510		—		—		2,510
Net income	—	—		—	—		—		737		1,182		1,919
Distributions to non-controlling interest holders	—	—		—	—		—		—		(3)		(3)
Redemption of common units in i3 Verticals, LLC	510,016	—		(510,016)	—		2,597		—		(2,597)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		596		—		—		596
Exercise of equity-based awards	31,125	—		—	—		2		—		—		2
Equity component of exchangeable notes, net of issuance costs and deferred taxes	—	—		—	—		27,569		—		—		27,569
Purchases of exchangeable note hedges	—	—		—	—		(28,676)		—		—		(28,676)
Issuance of warrants	—	—		—	—		14,669		—		—		14,669
Balance at March 31, 2020	15,038,918	1		12,411,621	1		104,122		(1,016)		63,673		166,781
Equity-based compensation	—	—		—	—		2,816		—		—		2,816
Forfeitures of restricted Class A common stock	—	—		—	—		—		—		—		—
Net (loss)	—	—		—	—		—		(356)		(2,454)		(2,810)
Distributions to non-controlling interest holders	—	—		—	—		—		—		—		—
Redemption of common units in i3 Verticals, LLC	20,000	—		(20,000)	—		75		—		(75)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		61		—		—		61
Exercise of equity-based awards	26,895	—		—	—		—		—		—		—
Equity component of exchangeable notes, net of issuance costs and deferred taxes	—	—		—	—		9		—		—		9
Repurchases of exchangeable note hedges	—	—		—	—		571		—		—		571
Balance at June 30, 2020	15,085,813	$	1	12,391,621	$	1	$	107,654	$	(1,372)	$	61,144	$	167,428

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine months ended June 30,
	2021		2020
Cash flows from operating activities:
Net (loss) income	$	(8,769)	$	1,043
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	17,938		13,668
Equity-based compensation	12,694		7,450
Provision for doubtful accounts	129		105
Amortization of debt discount and issuance costs	4,057		2,274
Debt issuance costs write offs	—		141
Loss on repurchase of exchangeable notes	—		828
Amortization of capitalized customer acquisition costs	386		288
Loss on disposal of assets	—		1
Unrealized gain on investment	(2,353)		—
Benefit from deferred income taxes	(416)		(2,802)
Non-cash lease expense	2,328		—
(Decrease) Increase in non-cash contingent consideration expense from original estimate	5,835		(1,461)
Changes in operating assets:
Accounts receivable	(2,862)		(789)
Prepaid expenses and other current assets	1,049		(1,848)
Other assets	(915)		(1,399)
Changes in operating liabilities:
Accounts payable	1,190		989
Accrued expenses and other current liabilities	12,395		(2,896)
Deferred revenue	39		(454)
Operating lease liabilities	(2,311)		—
Other long-term liabilities	(697)		(12)
Contingent consideration paid in excess of original estimates	(3,636)		(5,039)
Net cash provided by operating activities	36,081		10,087

Cash flows from investing activities:
Expenditures for property and equipment	(1,364)		(1,883)
Expenditures for capitalized software	(4,483)		(2,048)
Purchases of merchant portfolios and residual buyouts	(1,500)		(1,677)
Acquisitions of businesses, net of cash acquired	(149,495)		—
Acquisition of other intangibles	(104)		(136)
Net cash used in investing activities	(156,946)		(5,744)

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

(In thousands)


	Nine months ended June 30,
	2021		2020
Cash flows from financing activities:
Proceeds from revolving credit facility	262,264		125,024
Payments on revolving credit facility	(144,435)		(231,214)
Proceeds from borrowings on exchangeable notes	—		138,000
Payments for purchase of exchangeable senior note hedges	—		(28,676)
Proceeds from issuance of warrants	—		14,669
Payments for repurchase of exchangeable notes	—		(6,807)
Payments of debt issuance costs	—		(5,215)
Cash paid for contingent consideration	(2,886)		(2,988)
Payments for required distributions to members for tax obligations	—		(3)
Proceeds from stock option exercises	1,286		474
Payments for employee's tax withholdings from net settled stock option exercises	(710)		(121)
Net cash provided by financing activities	115,519		3,143

Net (decrease) in cash, cash equivalents, and restricted cash	(5,346)		7,486
Cash, cash equivalents, and restricted cash at beginning of period	20,601		3,200
Cash, cash equivalents, and restricted cash at end of period	$	15,255	$	10,686

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,800	$	3,955
Cash paid for income taxes	$	280	$	404

See Notes to the Interim Condensed Consolidated Financial Statements

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

1. ORGANIZATION AND OPERATIONS

i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated payment and software solutions to small- and medium-sized businesses (“SMBs”) and organizations in strategic vertical markets. The Company’s headquarters are located in Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC.

Initial Public Offering

On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock at a public offering price of $13.00 per share. The Company received approximately $92,500 of net proceeds, after deducting underwriting discounts and commissions, which the Company used to purchase newly issued common units from i3 Verticals, LLC (the “Common Units”), and Common Units from a selling Common Unit holder, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of the Company's Class A common stock in the IPO.

Reorganization Transactions

In connection with the IPO, the Company completed the following transactions (the “Reorganization Transactions”):

•i3 Verticals, LLC amended and restated its existing limited liability company agreement to, among other things, (1) convert all existing Class A units, common units (including common units issued upon the exercise of existing warrants) and Class P units of ownership interest in i3 Verticals, LLC into either Class A voting common units of i3 Verticals, LLC (such holders of Class A voting common units referred to herein as the “Continuing Equity Owners”) or Class B non-voting common units of i3 Verticals, LLC (such holders of Class B non-voting common units referred to herein as the “Former Equity Owners”), and (2) appoint i3 Verticals, Inc. as the sole managing member of i3 Verticals, LLC upon its acquisition of Common Units in connection with the IPO;

•the Company amended and restated its certificate of incorporation to provide for, among other things, Class A common stock and Class B common stock;

•i3 Verticals, LLC and the Company consummated a merger among i3 Verticals, LLC, i3 Verticals, Inc. and a newly formed wholly-owned subsidiary of i3 Verticals, Inc. (“MergerSub”) whereby: (1) MergerSub merged with and into i3 Verticals, LLC, with i3 Verticals, LLC as the surviving entity; (2) Class A voting common units converted into newly issued Common Units in i3 Verticals, LLC together with an equal number of shares of Class B common stock of i3 Verticals, Inc., and (3) Class B non-voting common units converted into Class A common stock of i3 Verticals, Inc. based on a conversion ratio that provided an equitable adjustment to reflect the full value of the Class B non-voting common units; and

•the Company issued shares of its Class A common stock pursuant to a voluntary private conversion of certain subordinated notes by certain related and unrelated creditors of i3 Verticals, LLC.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Following the completion of the IPO and Reorganization Transactions, the Company became a holding company and the principal asset that it owns are the Common Units in i3 Verticals, LLC. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a majority economic interest in i3 Verticals, LLC.

Public Offering

On September 15, 2020, the Company completed a public offering (the “September 2020 Public Offering”) of 3,737,500 shares of its Class A common stock, at a public offering price of $23.50 per share, which included a full exercise of the underwriters' option to purchase 487,500 additional shares of Class A Common Stock from the Company. The Company received approximately $83,400 of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. The Company used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3 Verticals, LLC, and (2) 487,500 Common Units pursuant to the exercise of the underwriters' option to purchase additional shares in full and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of the Company's Class A common stock in the offering. i3 Verticals, LLC received $72,018 in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness.

•As of June 30, 2021, i3 Verticals, Inc. owned 68.2% of the economic interest in i3 Verticals, LLC.

•As of June 30, 2021, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 31.8% of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.6% of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 31.8% of the voting power in the Company.

•The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock.

•Combining the Class A common stock and Class B common stock, the Continuing Equity Owners hold approximately 32.4% of the economic interest and voting power in i3 Verticals, Inc.

i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners.

As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of June 30, 2021 and for the

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

three and nine months ended June 30, 2021 and 2020. The results of operations for the three and nine months ended June 30, 2021 and 2020 are not necessarily indicative of the operating results for the full year. It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2020 and 2019, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020.

Principles of Consolidation

These interim condensed consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Restricted Cash

Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying condensed consolidated balance sheets since the related agreements extend beyond the next twelve months.

Settlement Assets and Obligations

Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expense, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days. As of June 30, 2021, settlement assets and settlement obligations were both $4,963. As of September 30, 2020, the Company had no settlement assets or settlement obligations.

Inventories

Inventories consist of point-of-sale equipment to be sold to clients and are stated at the lower of net realizable value or cost, determined on either a weighted average or specific basis. Inventories were $2,281 and $1,309 at June 30, 2021 and September 30, 2020, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

Acquisitions

Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method. The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

The operating results of an acquisition are included in the Company’s condensed consolidated statements of operations from the date of such acquisition. Acquisitions completed during the nine months ended June 30, 2021 contributed $31,961 and $891 of revenue and net income, respectively, to the Company's condensed consolidated statements of operations for the nine months then ended.

Leases

The Company adopted ASU 2016-02, Leases, (“ASC 842”) on October 1, 2020, using the optional modified retrospective method under which the prior period financial statements were not restated for the new guidance. The Company elected the accounting policy practical expedients for all classes of underlying assets to (i) combine associated lease and non-lease components in a lease arrangement as a combined lease component and (ii) exclude recording short-term leases as right-of-use assets on the condensed consolidated balance sheets.

At contract inception the Company determines whether an arrangement is, or contains a lease, and for each identified lease, evaluates the classification as operating or financing. Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease. Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised. The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset. The incremental borrowing rate is a fully collateralized rate that considers the Company’s credit rating, market conditions and the term of the lease. The Company accounts for all components in a lease arrangement as a single combined lease component.

Operating lease cost is recognized on a straight-line basis over the lease term. Total lease costs include variable lease costs, which are primarily comprised of the consumer price index adjustments and other changes based on rates, such as costs of insurance and property taxes. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and obligations.

Revenue Recognition and Deferred Revenue

Revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience. The Company utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. The Company adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption.

The majority of the Company's revenue for the nine months ended June 30, 2021 and 2020 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software licensing subscriptions, ongoing support, and other POS-related solutions the Company provides to its clients directly and through its processing bank relationships.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type. The Company frequently enters into agreements with clients under which the client engages the Company to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the client, regardless of which issuing bank and card network to which the transaction relates. The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its clients require on a daily basis over the contract term. These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the client, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed.

The Company follows the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations, which states that the determination of whether a company should recognize revenue based on the gross amount billed to a client or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under its agreements, the Company incurs interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors: (1) the Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and the Company has no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively.

With regards to the Company's discount fees, generally, where the Company has control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees. Revenues generated from merchant portfolios where the Company does not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs.

Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, gateway fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from fixed transactions, which principally relate to the sale of equipment, is recognized upon transfer of ownership and delivery to the client, after which there are no further performance obligations.

Revenues from sales of the Company’s software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. The Company generates sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when delivered to the client. The Company also offers access to its software under

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

software-as-a-service (“SaaS”) arrangements, which represent services arrangements. Revenue from SaaS arrangements is recognized over time, over the term of the agreement.

Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal factors such as margin objectives, pricing practices and controls, client segment pricing strategies and the product life cycle. In arrangements with multiple performance obligations, the Company determines allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of the Company's revenue recognition.

Revenues from sales of the Company’s combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed.

The tables below present a disaggregation of the Company's revenue from contracts with clients by product by segment. Refer to Note 12 for discussion of the Company's segments. The Company's products are defined as follows:

•Payments — Includes discount fees, gateway fees and other related fixed transaction or service fees.

•Other — Includes sales of software, sales of equipment, professional services and other revenues.


	For the Three Months Ended June 30, 2021
	Merchant Services		Proprietary Software and Payments		Other		Total
Payments revenue	$	24,995	$	7,770	$	(542)	$	32,223
Other revenue	4,917		24,845		(21)		29,741
Total revenue	$	29,912	$	32,615	$	(563)	$	61,964


	For the Three Months Ended June 30, 2020(1)
	Merchant Services		Proprietary Software and Payments		Other		Total
Payments revenue	$	18,334	$	2,724	$	(412)	$	20,646
Other revenue	3,888		7,043		(4)		10,927
Total revenue	$	22,222	$	9,767	$	(416)	$	31,573

________

1.Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. Refer to Note 12 for further discussion. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)


	For the Nine Months Ended June 30, 2021
	Merchant Services		Proprietary Software and Payments		Other		Total
Payments revenue	$	67,051	$	20,756	$	(1,636)	$	86,171
Other revenue	13,823		53,184		(38)		66,969
Total revenue	$	80,874	$	73,940	$	(1,674)	$	153,140


	For the Nine Months Ended June 30, 2020(1)
	Merchant Services		Proprietary Software and Payments		Other		Total
Payments revenue	$	62,247	$	14,504	$	(1,347)	$	75,404
Other revenue	13,943		22,525		(10)		36,458
Total revenue	$	76,190	$	37,029	$	(1,357)	$	111,862

________

The tables below present a disaggregation of the Company's revenue from contracts with clients by timing of transfer of goods or services by segment. The Company's revenue included in each category are defined as follows:

•Revenue transferred over time — Includes discount fees, gateway fees, sales of SaaS and ongoing support contract revenue.

•Revenue transferred at a point in time — Includes fixed service fees, software licenses sold as functional intellectual property, professional services and other equipment.


	For the Three Months Ended June 30, 2021
	Merchant Services		Proprietary Software and Payments		Other		Total
Revenue transferred over time	$	22,566	$	20,524	$	(520)	$	42,570
Revenue transferred at a point in time	7,346		12,091		(43)		19,394
Total revenue	$	29,912	$	32,615	$	(563)	$	61,964

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)


	For the Three Months Ended June 30, 2020(1)
	Merchant Services		Proprietary Software and Payments		Other		Total
Revenue transferred over time	$	15,902	$	6,712	$	(402)	$	22,212
Revenue transferred at a point in time	6,320		3,055		(14)		9,361
Total revenue	$	22,222	$	9,767	$	(416)	$	31,573

______


	For the Nine Months Ended June 30, 2021
	Merchant Services		Proprietary Software and Payments		Other		Total
Revenue transferred over time	$	59,844	$	49,941	$	(1,540)	$	108,245
Revenue transferred at a point in time	21,030		23,999		(134)		44,895
Total revenue	$	80,874	$	73,940	$	(1,674)	$	153,140


	For the Nine Months Ended June 30, 2020(1)
	Merchant Services		Proprietary Software and Payments		Other		Total
Revenue transferred over time	$	54,503	$	25,838	$	(1,336)